Fairness-adjusted Laffer curve: cross-country and cross-method experimental comparison

The author reports results from controlled laboratory experiments on the Laffer curve. Apart from studying the existence of the Laffer curve under exogenous taxation, he explores framing effects, productivity differences under the strategic method and the direct method, and cultural differences. The data collected in Japan and Pakistan delivers evidence for framing effects, although cognitively sophisticated participants doing well on the CRT questions are less prone to it. The average productivity is greater for the strategic method in the case of Pakistan, but there is no significant difference across the two methods in the case of Japan. On average, whether tasks are exogenously assigned or chosen by participants does not affect productivity. The author argues that the Laffer curve is not the result of a simple leisure-income tradeoff. Instead, the disutility of work and fairness perceptions related to taxation plays an important role on the work decisions. A simple behavioral model that incorporates these features induces a ‘fairness adjusted’ Laffer curve, with a negative relationship between tax rate and tax revenue in the 53–57% tax range.